Money In The Ground

To hear it from the builders of pipelines, just how much new—and geographically diverse—crude oil and gas liquids is expected to come online in this decade is put into a unique perspective: How much will be spent to get it to markets?

“Between 2011 and 2020, it is estimated that more than $100 billion will be invested in the pipeline infrastructure in this country,” says Jim O’Neil, Quanta Services Inc. president and chief executive officer. Of that, O’Neil estimates $78 billion will be spent on large-diameter—aka “big pipe”—infrastructure and about $30 billion on small-diameter laterals and gathering infrastructure.

Houston-based Quanta is one of the leading pipeline contractors in the U.S. and also works for the electric-power and telecom industries. All of its business lines are gaining in revenues for the first time since 2008, O’Neil reported in a special “analyst day” meeting recently that included 119 slides.

“North America, we believe, is in the very early stages of a multiyear investment cycle, particularly in the electric-power and pipeline segments,” O’Neil says. “…The unconventional shale plays are an energy game-changer for this country…Shale-gas discoveries are transforming market dynamics and creating pipeline demand outside traditional flow patterns.”

Producers are asking for large-job interstate pipe as well as small-job gathering infrastructure, and the inbounds are only just beginning, O’Neil predicts. “We are in the very early stages of development of this infrastructure .”

To complement its lumpy big-pipe construction revenues, which tend to show up in one half of the year and not the other, Quanta is shifting some resources to building small-pipe systems as well. “The wet shales are extremely active and there’s not enough gathering infrastructure in place to get the product to market. There’s so much gathering-system work to be done today that it almost has a ‘recurring revenue’ feel to it.”

Quanta’s backlog was $650 million in the first quarter and it was expecting additional project awards this spring, including in the new gathering-pipe segment. “At this time last year, we had $0 in shale gathering-system backlog. Today, I would estimate that almost half of our segment backlog is in (those) projects.”

Duke Austin, president of Quanta’s electric-power and pipeline divisions, estimates $3.8 billion was spent on big- and small-pipe construction in the Bakken, Eagle Ford, Marcellus, Niobrara and Permian alone last year. For this year, he estimates $6.5 billion and, in 2013, another $8.8 billion.

Oil production from the Bakken play in North Dakota has now reached some 600,000 barrels per day, up from virtually none just five years ago, according to John Seidl, director of E&P research for Dahlman Rose & Co. In that same timeframe, new Canadian oil production has put between 2-and 2.4 million barrels of oil per day into the U.S. market, up from some 1.8 million, Seidl adds.

And the barely year-old Mississippi Lime oil and gas liquids play in northern Oklahoma and southern Kansas has SandRidge Energy Inc. in an arrangement with Plains All American Pipeline LP to ship out 150,000 barrels a day. Meanwhile, Chesapeake Energy Corp. is in a deal with Semgroup Corp. and Gavilon LLC to send out 140,000, note analysts with Tudor, Pickering, Holt & Co. Securities Inc.

Bottlenecks are growing, Seidl says, as Canadian oil meets with North Dakota oil in trying to get to the U.S. Gulf Coast. Both are running into new Oklahoma oil production—and new Permian production that currently goes through Cushing—along the way.

Quanta’s Austin says, “The pipeline infrastructure required to transport the product to market in the most economical manner is not in place yet. This is forcing producers to ride on rail and trucks, which is not as cost effective or as safe.”

Drillers’ success in surfacing hydrocarbons from new, horizontal-well fields has the traditional U.S. product-delivery system on its head. In the Marcellus, for example, Austin says, “there might be a double-whammy (opportunity). You have a line of (dry) gas going one way and an NGL (natural gas liquids) line coming into the South or going north into Canada. So the shales, what’s nice about them is there are gas liquids in them as well as oil. So think about it as three lines instead of one…That makes a real nice business.”

For more commentary from Nissa, see the blog at http://blogs.oilandgasinvestor.com/nissa .